Managing Food and Beverage Supply in a Constrained World: Segmenting Your Suppliers

Due to a series of supply-and-demand pressures — from a growing middle class in developing markets to increasing weather volatility — the global food industry is rapidly transforming. As a result, leading food and beverage companies are rethinking their supplier relationships

Due to a series of supply-and-demand pressures — from a growing middle class in developing markets to increasing weather volatility — the global food industry is rapidly transforming. As a result, leading food and beverage companies are rethinking their supplier relationships.

The questions they are posing in an attempt to understand these changes point to the complex nature of the issues facing the industry today.

Are current suppliers prepared to apply new technology, adequately control sources of supply, and respond quickly in today’s dynamic, global marketplace? Do sourcing agreements favor short-term price advantages over long-term supply availability and security? Are supply partnerships adeptly managing increasing regulations on food safety, sustainability, and ingredient traceability? Are the right partnerships in place to deliver innovation to tomorrow’s consumers?

In asking these questions, many food companies are now reconsidering the future of their food products portfolio, and are assessing the agricultural constraints that they might face in the coming years. In order to secure supply sources, most will have to scale up or collaborate with key suppliers.   

Identifying Strategic Suppliers

For many companies, the first step in gaining control is to review their portfolio of suppliers, and segment them into specific categories based on the risk of supply and the strategic importance of the ingredient category.

How are strategic suppliers determined? While every supplier wishes to have a closer relationship with its customers, the nature and volatility of the category is the best indicator of risk. Some ingredient categories—such as beef, garlic and citrus products—have become increasingly more volatile in recent years. Other categories are being redefined based on consumer perceptions and choices such as non-GMO ingredients, sustainable oils and cage-free poultry. Different supplier risks apply to each of these categories, based on the supplier’s access to goods and their agility and innovation. Segmenting suppliers based on their level of strategic importance allows food manufacturers to capture current opportunities within supply networks, to get in line for future ones, and to strengthen the most valuable opportunities.

After identifying potential strategic suppliers, the next step is working to create a mutually beneficial partnership based on shared goals, ownership, and risk. These partnerships may be exclusive or not; but often they will lead to new and better ways of getting product to the customer. Three types of distinct supplier interaction models offer the best chance for success:

  • Influence. In this model, a company taps into supplier technology to develop and launch new products or services jointly. Exclusivity is typically not a requirement.
  • Integrate. Here, a company enters into a multi-year relationship, the objective being to shape the market. There is often an opportunity to change the rules of the industry, if there is a sizeable portfolio at stake. Exclusivity with strategic supply partners may be an option to allow for game-changing moves.
  • Invest. The company and the strategic supplier jointly build competencies and commit resources on both sides to develop game-changing portfolios.

The effort to create and maintain strategic supplier relationships is not a trivial task, but at the same time strategic supply partnerships unlock competitive value, retain expected benefits, secure supply and lower risk exposure.

Rethinking supply requires food and beverage leadership to ask the hard questions, to make choices between suppliers based on future potential, and to influence, integrate, and invest where appropriate in sourcing initiatives with longer payoff horizons. Marketing strategies need to anticipate rapid changes in both consumer tastes and ingredient availability. The future is bright for companies that know their strategic suppliers and develop relationships that achieve innovation, share risk, and provide for ongoing product security, sustainability, and long-term advantage.

About the Author

Dave Donnan is a partner and leads the Global Food and Beverage Practice of A.T. Kearney, a strategy and management consulting firm with offices in more than 40 countries worldwide. He is based in Chicago and can be reached at david.donnan@atkearney.com.

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